What is Finance Charge?

Definition

Finance Charge is the financial terms. It is the total cost of credit which should be paid by customer on consumer loan including interest. In other words, It is the cost of obtaining a loan or financing through debt. It is also known as interest accrued on some kind of credit. Perhaps, it does not only include interest, but also referred to other charges such as financial transactions fees, bank service charges, withdrawal fees etc.

In terms of Personal Finance

In terms of personal finance, It is referred to amount paid on debt or borrow money. On the other hand, interest is the amount paid like an annual percentage rate on the loan amount.

Finance Charge is different from Interest

Finance charge and interest seem to be narrow but their meaning, usages and calculation is totally different with respect to accounting definition.

Calculation

It is calculated differently by both creditors and lenders. Generally, the most common calculation of finance charge is the average daily balance which is equal to the sum of the daily outstanding balance divided by the number of days in the month.

In terms of Financial Accounting

In terms of financial accounting, finance charge is defined as Cost of Loan or any charge on borrowing amount. While Interest is used as synonym for the finance charge.

It is the aggregated cost charged by the lender. Aggregated cost included transaction fees, account maintenance, late fees along with the cost carrying debt itself.

Importance

The Finance charge is the best way to earn profit by lender. The lender makes money term as a finance charge for the use of their money. Finance Charge is the best way for commoditized credit services like home loans, car loans and credit cards. The amount of finance charge depends on the credit worthiness of the person who is seeking to borrow.